Input Tax Credit under GST

Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases.

Goods and Services Tax (GST) is an integrated tax system where every purchase by a business should be matched with a sale by another business. This makes flow of credit across an entire supply chain a seamless process.

How does ITC work

When a trader sells a good to consumers he collects GST based on the HSN of the good sold and the place of destination. Let us assume that the MRP of the good is INR 1000 and the rate of applicable GST is 18%. The consumer will therefore, pay a total of INR 1180 for the good which includes a GST of INR 180. Without ITC, the trader will have to pay INR 180 to the government. With input tax credit or ITC, the trader can reduce the total tax that it will have to pay the government. This is how it works.

Let us assume that the cost of the good in the hands of the trader is INR 825. This includes INR 125 as GST. The trader can claim INR 125 as input tax credit and reduce his original tax liability of INR 180 by this amount. In other words, the trader will need to pay only INR 55 (INR 180 – INR 125) to the government.

Conditions for claiming ITC

A business can claim ITC provided the following conditions have been met

It has a GST-compliant invoice

Its supplier has uploaded the invoice to the GSTN

Its supplier has paid GST to the government

Returns have been filed

A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.